Employee Need Not Give Severance Back Before Moving Forward
Monday, August 27, 2018

An employee signs a separation agreement and receives severance pay. The employee then has second thoughts, alleges she was coerced into signing the agreement, and wants to pursue her discrimination claims in court. Must the employee give back the severance before suing?

On August 13, 2018, in McClellan v. Midwest Machining, the Sixth U.S. Circuit Court of Appeals (covering Kentucky, Michigan, Ohio, and Tennessee) joined the Eighth Circuit in answering: No.

Under the common law of many states, and especially in commercial cases, the party seeking to invalidate a settlement agreement must first “tender back” the monies received before proceeding in court. The Sixth Circuit majority concluded (in agreement with the EEOC, which submitted a brief in support of the employee’s position), based upon policy and practical reasons, that the tender back doctrine does not apply to federal discrimination claims.

First, the court reasoned that federal discrimination statutes further society’s goal of eliminating discrimination in the workplace and that consequently a different standard should be applied for these type of claims.

Second, the court recognized that the “economic realities” of an individual who had lost her job mean that she might not have the ability to tender back the severance. Relying on the Supreme Court’s 1998 decision in the Oubre v. Entergy Operations, Inc. case, the court also stated that a tender back requirement might motivate employers to act improperly, knowing that the employee would have a difficult time tendering back.

In short, while the court acknowledged that the severance should be deducted from any future award, these policy and practical reasons warranted a rejection of the tender back doctrine in discrimination cases. The dissent disagreed, arguing that there was nothing in the language of Title VII or the EPA to abrogate the tender back doctrine.

From an employer’s perspective, this case chips away at the primary objective of paying severance and obtaining a release – closure. In eliminating a duty to pay back the money first, the opinion eliminates a deterrent to challenging releases. This, in turn, at a minimum results in the employer paying attorney fees to fight a battle that it thought was resolved forever.

One potential deterrent remains, however. In McClellan, the employee alleged that she was not provided with the time to review the agreement, that the company’s president raised his voice when presenting the agreement, that she could not ask questions, that she did not feel free to leave the room, and that she generally felt bullied to sign the agreement.

An employer can minimize the chances that an employee or her attorney will challenge a release by doing the opposite – providing the employee with the time to review the agreement, answering questions, making the release clear, and avoiding behavior that could be perceived as bullying.


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